Gift Cards Are Ruining the Holidays!
In my role as editor of the e-weekly news from ERA, I end up reading a lot of articles about retailing statistics (I know, heady, glamorous stuff) and there are two things that keep popping up: retail sales generally are growing at around 4.8 percent while online purchases are making up a bigger percentage of sales this holiday season (20 percent to $39 billion, according to Jupiter Research). If you extrapolate that to figure out total holiday sales, we know that Americans will be spending $195 billion. But there is one factor that is lurking in the background that throws the whole equation into turmoil. Thirty-three percent of consumers planned to buy gift cards to the tune of a staggering total of $26.3 billion
You may be asking yourself, “Why should that matter?” Well, for one thing, $26.3 billion is not being recorded as part of the holiday shopping season, because that revenue is not recognized until the gift cards are redeemed. Or to look at it another way, the actual total collected by retailers if you throw in the gift card number will be $221.3 billion. So if $195 billion without gift cards represents a 4.8 percent increase, the math says that $221.3 billion represents a 19 percent increase in revenues over last year. Of course, that doesn’t include gift cards from last year. So while the analysis of the holiday shopping season is all glum and foreboding, the nay saying should be taken with a $26.3 billion grain of salt.
So here is the dilemma: traditionally, Joe Consumer had to buy something before the holidays or risk looking like a Grinch when he had no gifts for his friends, family, etc. So retailers would stock their shelves with product and then the sales after the holidays would be a way of clearing out excess inventory. Now Joe can give a gift card and justify the impersonal nature of the gift by pointing out that he has doubled the purchasing power of the amount he is offering to spend because there will be a 50 percent off post holiday sale. Assuming (because I hate complex math) that all of those gift cards are redeemed at retailers’ post holiday sales at an average of 40 percent off, that means that around $20.5 billion in profits will be lost to the gift cards. That is to say that $26.3 billion will buy $43.8 worth of product at 40 percent off. How long will retailers continue to give up all of that money in order to stick to holiday traditions like after-Christmas sales?
Another interesting potential impact of gift cards is in the area of online shopping. According to Shopzilla, 76.6 percent of stores will offer consumers the ability to redeem gift cards with web purchases. This means that if your Uncle Earl, the fly fisherman, lives in a remote area where there is no fly-fishing-megastore, you can still send him a fly-fishing-megastore gift card, and he can go on his iPhone and buy himself a new set of hip waders using the gift card you thoughtfully sent him for Chanukah. This also has the potential to impact tiny merchants who offer specialty products. I can send my business contacts a gift certificate for the fantastic local chocolate shop so that I can support my local economy, and they can redeem them online.
My last little obsessive compulsive piece of pointless statistical trivia is this: what percentage of those gift certificates end up sitting in the junk drawer way past their expiration date and when do stores get to recognize that little bit of unspent money left on that gift card as 100 percent pure profit? I don’t know, but I do know that if I had customers saying, “Here, hold onto this money for me. Uncle Earl will be in to buy a set of hip waders some time soon.” I’d smile and say, “Sure,” and then put that money in an interest bearing CD and hope that Uncle Earl is a lot senile.
Happy Holidays!
Peter Howson, ERA’s director of marketing
Tags: , ERA, gift cards, holiday sales, marketing, peter howson, retailers
December 19th, 2007 at 2:49 pm
You make a great point in your last paragraph. I have been wondering for a long time why it is that the revenue from gift cards “doesn’t count”. The retailer got the money, right? So the revenue should be counted from when the gift card was purchased.
And what happens when a gift card is never redeemed? Or if the balance draws down over time of non-use, as many card to. The retailer has the money, but the consumer never actually uses the card. That’s 100% pure profit.
When is the revenue reported in this case?
December 20th, 2007 at 11:26 am
Exactly! And how do our friends at the IRS count that?
Another thing that came to me later is the impact gift cards will have on labor. That’s $23.6 billionin sales that will have a much lower number of returns which should lower the cost of labor required for the post holiday shopping season.